Sole Proprietorships and Private Franchises

1
Chapter 25

• Sole Proprietorships and Private Franchises

2
Many forms of business available

• Traditional
• Corporation
• Proprietorship or partnership
• Had to choose take good with bad
• Today can combine characteristics
• S-Corp, LLC, professional corporation, contracts
  to modify

3
Variable Characteristics

• Taxation
• Liability of owners
• Transferability
• Duration
• Management
• Access to capital

4
Sole Proprietorships

• One owner
• Easy to form
• Easy to transfer
• Income taxed along with owners other income
• Unlimited liability
• dba names

5
Franchises

• A type of contractual arrangement
• Franchisees can be corporations, LLCs or any
  other form
• Allows a business to operate under a specific
  formula
• Allows use of known name, but limits how the
  franchisee operates

6
Regulation of Franchisors

• Much abuse by franchisors in the past
• Franchise can be livelihood of franchisee
• State regulation started in 1970s
• Uniform Franchise Offering Circular
• FTC Rule Disclosure required
• Any Sales projections require s and s who have
  obtained (or underlying assumptions if
  hypothetical).

7
Franchising rules and the internet

• Rule being amended to reflect internet
• Downloadable information Is this an offer?
• Disclosures in advance?
• Websites can now provide electronically
• One general purpose Time for franchisee to
  contemplate

8
Franchise contract provisions

• Fees Initial Royalties
• Services by franchisor
• Premises and location
• Business form/Capital Structure
• Quality control

9
Franchisor liability for franchisees torts

• Usually not liable
• Franchisee is neither agent nor employee
• Thus no franchisor liability
• But if apparent agent
• Franchisor can be liable
• Less likely today because more people understand
  franchise arrangements

10
Kerl v. Dennis Rasmussen, Inc.

• Right of control and/or exercise of control will
  imply agency
• General agency tort principles will apply
• Principal (franchisor) can be held liable for
  franchisees torts
• In this case, not enough control
• But frolic/detour also apply here

11
Pricing and Tying arrangements

• Franchisees often must buy from franchisor, or
  stated supplier OK, if a quality control issue.
  Pricing might be an issue, though (antitrust)
• Fast food industry
• Auto dealerships

12
Termination of Franchise Agreements

• Many wrongful termination cases
• Courts will often look at good faith
• One sided cancellation provisions sometimes not
  enforced